3.1: Production Function and Costs (copy)

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27 Terms

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Production

Converting inputs into outputs to earn profit.

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Input (Factor)

A resource used to make output, typically workers in examples.

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Total Physical Product (TP)

Total output or quantity produced.

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Marginal Product (MP)

Additional output generated by additional inputs (workers).

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Average Product (AP)

Output per unit of input.

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Fixed Resource

A resource that doesn’t change with the quantity produced (e.g., tables, scissors).

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Variable Resource

A resource that changes with the quantity produced (e.g., workers, papers).

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Law of Diminishing Marginal Returns

Additional output from each additional worker will eventually fall as variable resources are added to fixed resources.

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Increasing Marginal Returns

Stage where additional inputs lead to increasing output.

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Decreasing Marginal Returns

Stage where additional inputs lead to decreasing output.

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Negative Marginal Returns

Stage where additional inputs lead to negative output.

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Short-run

Period in which at least one resource is fixed; capacity/size is not changeable.

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Long-run

Period in which all resources are variable; capacity/size is changeable.

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Total Costs

The sum of fixed and variable costs.

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Fixed Costs (FC)

Costs for fixed resources that don’t change with production amount (e.g., rent).

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Variable Costs (VC)

Costs for variable resources that change with production amount (e.g., raw materials).

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Average Fixed Cost (AFC)

Fixed cost per unit of output.

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Average Variable Cost (AVC)

Variable cost per unit of output.

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Average Total Cost (ATC)

Total cost per unit of output.

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Marginal Cost (MC)

Additional cost of producing one more unit of output.

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Returns to Scale

Describes how output changes as inputs change.

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Increasing Returns to Scale

Output more than doubles as inputs increase.

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Constant Returns to Scale

Output exactly doubles as inputs increase.

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Decreasing Returns to Scale

Output less than doubles as inputs increase.

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Economies of Scale

Firms that produce more can lower average costs through mass production techniques.

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Diseconomies of Scale

Long-run average costs increase as the firm becomes too large and difficult to manage.

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Big Idea

The law of diminishing marginal returns doesn’t apply in the long run due to the absence of fixed resources.